Carbon tariffs

It is only a matter of time before the first state imposes an import tariff on goods from countries that are not taking action on climate change. On one level, that is fair enough. If domestic manufacturers are paying for their CO2 emissions through a cap-and-trade scheme or carbon tax, they have some legitimate objections against imports from foreign competitors who are not doing so. That said, the actual experience with the first such tariffs is likely to be a huge legal and political mess.

Membership in the World Trade Organization – something common to most big emitters – carries a number of obligations of varying levels of obscurity and enforcement. You can bet that countries that have such tariffs applied to them will protest such treatment aggressively. It would also be fair to bet that the winner of the contest will be determined on the basis of economic power, rather than the rightness or wrongness of arguments. It is even possible that the resulting compromise will be worse from a greenhouse gas mitigation standpoint than if the argument had never begun.

That said, it is at least logically possible for the global trading system to help in the development of an effective global regime of rules, norms, and decision-making procedures around the issue of climate change. It obviously won’t have an effect on countries that don’t do a lot of trading, but they are probably not the most essential ones to get on board anyhow. What will matter most is which of the two biggest economic blocs will triumph: the United States, still in denial about what solving climate change will require, or Europe, where at least some leading states are starting to get serious.

Perhaps the most hilarious example of the WTO’s character as a mere agreement which can be exited or disobeyed at any time purely by power is Europe’s challenge to the U.S. on their continual blockade on Cuba. Despite the ruling falling absolutely in the favour of the E.U. the U.S. chose to disregard it on the grounds that they have a right to have a policy which is to overthrow a sovereign state, which they have had in the case of Cuba since the 60s.

The fair comparison is not between the WTO and some mythical world where trade is conducted in perfect accordance with international law – it’s between the WTO and a world where only naked economic power has any importance whatsoever. You can certainly debate the overall value of the WTO, but it is niave to expect it to trump all other considerations.

The only mention of Cuba in the EU’s “Factsheet on US Non-Compliance with WTO rulings” is a complaint about a law that “prohibits, under certain conditions, the registration or renewal of a trademark previously owned by a confiscated Cuban entity and sets forth that no US Court shall recognise or enforce any assertion of such rights.”

As rich countries push away from the table after four decades of environmental degradation, the poor ones are stuck with the bill, says new research attempting to assess the costs and causes of human economic activity.

According to a paper published Monday in the U.S.-based Proceedings of the National Academy of Science, low-income nations subsidized the living standards of middle-and high-income nations by more than $3 trillion between 1961 and 2000 – almost all of that caused by climate change.

Some businesses are, understandably, concerned about the consequences for their competitiveness. Energy-intensive companies maintain that a carbon price high enough to make a difference will push costs up and companies out. Emissions will not be cut: they will go abroad.

That is a serious consideration, particularly when other developed countries (especially America) are slow to adopt carbon constraints. Yet a study of British industry published this week by Britain’s Carbon Trust undermines the idea that a carbon price of €20 ($30) a tonne—high enough to make a range of clean-energy technologies worthwhile—would be a huge burden. It suggests that industries making up less than 1% of Britain’s GDP (and 50% of its manufacturing emissions) would be “significantly” affected. Aluminium, cement and some steel production are the most vulnerable. The Carbon Trust reckons that the ETS can bring about deeper cutbacks in its next phase, after 2012, without damaging competitiveness.

Still, while Europe has a carbon price and the rest of the world does not, there is a cost. If the rest of the world follows where Europe leads, that temporary price will be worth paying. If it doesn’t, it won’t; and Europe will eventually give up trying to cut its emissions.

1. People face tradeoffs.
2. The cost of something is what you give up to get it.
3. Rational people think at the margin.
4. People respond to incentives.
5. Trade can make everyone better off.
6. Markets are usually a good way to organize economic activity.
7. Governments can sometimes improve market outcomes.
8. A country’s standard of living depends on its ability to produce goods and services.
9. Prices rise when the government prints too much money.
10. Society faces a short-run tradeoff between inflation and unemployment.

On the matter of Cuba, it should be stressed that the present government is well deserving of its listing among the “worst of the worst” by Freedom House. While that doesn’t necessarily mean we should support the American embargo, it does give reason to question the rosy view of the island despotism so popular among leftists living in richer, freer places.

But bowing to pressure from industry lobbies, the commission announced that it would not allow the ETS to preside over “carbon leakage”, an ugly term meaning the relocation of steelworks and the like from Europe to countries with non-binding climate-change standards. If countries such as America and China have not signed up to binding international agreements by 2011, then big emitters inside the EU may be given their allowances free, the commission said, or firms outside the EU could be forced to buy permits in the ETS, to apply to their imports. This is not a threat or blackmail, insist EU officials. Nor is it protectionism, claimed Mr Barroso. Europe was merely saying “join us” to other countries.

U.S. failure to enact limits on global warming emissions could cost American companies that export to the European Union.

E.U. President Jose Manuel Barroso on Sunday said the European Commission is considering a charge on importers from nations without carbon limits. Companies from those countries may be required to buy carbon emissions allowances on exports into the E.U. This is intended to level the playing field with European companies who are already part of the European Emissions Trading System instituted to meet E.U. obligations under the Kyoto climate treaty.

Barroso said the Commission could “require importers to obtain allowances (emissions permits) alongside European competitors … There would be no point in pushing EU companies to cut emissions if the only result is that production and indeed pollution shifts to countries with no carbon disciplines at all.”

At the recent U.N. Climate Conference in Bali, Indonesia, the E.U. proposed internationally binding goals to reduce emissions to 25-40 percent below 1990 levels by 2020. The U.S. refused to make that commitment.

Climate policy advocates have long maintained that a crucial reason to pass carbon limits at state and federal levels is to maintain U.S. economic competitiveness in a carbon-constrained world. Putting a price on carbon emissions sends a market signal that alerts companies to become more efficient and to invest in low-carbon products. The E.U. appears close to forcing U.S. companies to begin pating for carbon emissions, even in the absence of U.S. climate policy.

Washington state is the nation’s leading exporter per capita with export engines such as Boeing. Passage of the Washington Climate Action and Green Jobs Bill before the 2008 Legislature will prepare the state to enter a carbon cap-and-trade system being created by western states. That system could link up with similar systems at various stages of development in the Northeast and Midwest, as well as the E.U. Prospectively, exporters based in states that take part in trading systems might be advantaged over states without carbon limits. This adds to the case for passage of climate policy at the state level.

Jun 19th 2008
From The Economist print edition
Are countries that regulate greenhouse gases exposing their industries to unfair competition from those that do not?

IN AMERICA they call it the China question. In Europe they call it the America question. In every country that has contemplated regulating greenhouse gases, it is seen as a problem: how can policy ensure that legal limits on emissions do not put local firms at a disadvantage to their foreign competitors? After all, if the cost of compliance puts factories in countries with strict rules out of business, while those in grubbier places flourish, a regulation is worse than useless. The planet’s emissions stay the same, or rise, while the country doing its bit for the environment loses investment and jobs.

European and Asian climate leaders cautioned the United States yesterday against passing domestic legislation that taxes imports from countries that don’t also cap carbon dioxide emissions.

Known as a border tax, the measure is widely seen among U.S. lawmakers as a way to protect American industries and workers from losing a competitive edge to other nations — especially China — that would not face the higher manufacturing costs that come with reducing greenhouse gases.

But the proposal is frowned upon in Europe, where many believe such a tax would only set off a trade war.

US President Barack Obama expressed his opposition to a provision in the clean energy bill that would impose trade penalties on countries that do not accept limits on global warming pollution, The New York Times reported.

The newspaper said Obama had told a small group of reporters at the White House that at a time when the global economy is still deep in recession, he thought “we have to be very careful about sending any protectionist signals out there.”

“I think there may be other ways of doing it than with a tariff approach,” the president was quoted by the paper as saying.

On Friday, the US House of Representatives narrowly passed legislation to limit pollution blamed for global warming, handing Obama a hard-fought major victory.

Cap-and-trade legislation passed by the House of Representatives late on Friday will make it easier for the US to impose import tariffs against countries that do not control their own carbon emissions.

Passage of the bill – it is likely to face an even tougher fight in the Senate – was welcomed by environmental groups and some sections of business, but others warned the so-called “border tax adjustment” provisions could aggravate tensions with the US’s trading partners.

Such border measures – intended to level the playing field by equalising carbon emission charges between domestic production and imports – might be permitted by World Trade Organisation rules, according to a report published last week by the WTO and the United Nations.

But judicial rulings on similar disputes made in the past by WTO arbitration panels leave considerable doubt. Countries such as China complain the measures can act as a form of backdoor protectionism.

Provisions added to the House bill at a late stage would automatically impose such border measures on imports in 2020 unless both the White House and Congress were to agree to waive them. “[That] automatically sets the switch for border measures to ‘on’ and makes it harder to turn it off,” said Jacob Werksman, programme director at the World Resources Institute.

PAUL KRUGMAN doesn’t seem to be paying attention to the arguments opponents of carbon tariffs are actually making. It’s much easier, I guess, to make up an opposing view to debate against. He writes:

“So the economics are right; it’s WTO-legal; and it would neutralize a major political argument against controlling greenhouse gases. Why, oh, why, would Obama say “Ni”?”

Mr Krugman seems to be suggesting that Mr Obama is just an idiot for not seeing the obvious. But as I’ve argued before, non-idiots who are actually concerned about climate change recognise that an American climate law cannot do much about warming on its own. It is most valuable, rather, as a means to facilitate a meaningful global agreement on emission reductions. And so if Mr Obama dislikes the idea of carbon tariffs, it may be because he thinks that carbon tariffs are likely to be counterproductive to this goal. He may think that China and India will respond to carbon tariffs as countries frequently respond to trade restrictions,by retaliating or otherwise becoming indignant.

It may well be that carbon tariffs imposed by major importers will be the only way to cajole rich states that have been indifferent to climate change so far to take action. If the US and EU established tariffs at the same level as domestic carbon taxes, it would be a WTO-compliant move that could lead to effective policies being deployed in places like Canada and Australia.

Nov 19th 2009
From The Economist print edition
The tension between free trade and capping emissions

…

Just as bananas are best grown in warmer places, imposing a higher carbon price does not compel German manufacturers of capital goods to decamp to China. Also, the increased output of some energy-intensive goods in poorer countries draws some productive resources away from other industries there. Overall, the authors find that if Europe and America were to reduce emissions by 17% from their 2005 levels by 2020, the additional increase in developing-country emissions would be only 1%. Global emissions would still be almost 10% lower than if nothing had been done. So rising global emissions due to carbon leakage are hardly as big a worry as some make them out to be.

That has not stopped many from proposing taxes that would penalise exports from countries that benefit from low carbon prices. From the point of view of countries with stricter environmental rules, it is easy to see why. According to the study, to reduce its emissions by 17% America would have to cut its exports of energy-intensive goods, such as steel, by 12% and its production of such goods by 4%. Domestic producers of energy-intensive goods, on whom much of the burden of adjustment will fall, will demand some form of compensation or protection. No wonder the climate bill passed by the House of Representatives in America has a provision for taxing imports from countries that have laxer rules on emissions. Nicolas Sarkozy, France’s president, has proposed that Europe adopt a similar strategy, arguing that not to do so would amount to “massive aid to relocations”.

Green.viewTrading down
Industry’s move from the rich to the poor world is confusing the carbon accounts

Mar 9th 2010 | From The Economist online

ON MARCH 4th The Economist ran a story about the challenges facing scientists who are trying to find out which greenhouse gases come from where. On March 8th a paper published in the Proceedings of the National Academy of Sciences by Steve Davis and Ken Caldeira of the Carnegie Institution’s campus at Stanford University brought to the fore a further problem in trying to figure out who emits what—one that turns not on how carbon flows through the atmosphere and biosphere, but on how it flows through the world economy. Who should be held responsible for the greenhouse-gas emissions involved in making, say, a flat-screen television? The country where the television is made? Or the country where it ends up being used?

Looking at the carbon emissions associated with a country’s consumption, rather than its production, does not change the general outline of what is going on in the world: rich people still emit more carbon dioxide than poor people do. But it does heighten the contrast. Rich countries which import manufactured goods from poorer ones end up with even higher emissions; poor countries that export a lot of manufactured goods with lower ones. Using figures from 2004, the most up to date that have the sort of industry-specific data they need, Dr Davis and Dr Caldeira reveal the striking scale of this effect. They find that roughly a quarter of the world’s emissions end up being consumed somewhere other than where they are produced. For a few small and reasonably post-industrial countries, such as Switzerland, the emissions associated with total consumption (emissions produced in Switzerland minus those associated with goods produced there and subsequently exported plus those associated with goods imported) are more than twice the emissions actually produced on Swiss territory.

BRUSSELS (Reuters) – The European Union has yielded to Canadian demands it remove possible trade barriers to polluting oil sands to avoid further damage to ties, according to sources and leaked documents.

Relations are already strained after the European Union banned imports of seal products last July on animal welfare grounds, a move Canada is challenging at the World Trade Organization.

Canada warns that draft EU standards to promote greener fuels are too unwieldy and will harm the market for its oil sands — tar-like oil that is trapped in sediment and forms the world’s second-largest proven crude reserves after Saudi Arabia.

“Such a system would be extremely difficult to implement and monitor, and would in itself create barriers to trade,” Canadian Ambassador Ross Hornby told a top official at the European Union’s executive in a letter seen by Reuters.

“Imagine setting up cap-and-trade systems in China and the United States — but allow international trading in permits, so Chinese and American companies can trade emission rights. By setting overall caps at levels designed to ensure that China sells us a substantial number of permits, we would in effect be paying China to cut its emissions. Since the evidence suggests that the cost of cutting emissions would be lower in China than in the United States, this could be a good deal for everyone.

But what if the Chinese (or the Indians or the Brazilians, etc.) do not want to participate in such a system? Then you need sticks as well as carrots. In particular, you need carbon tariffs.

A carbon tariff would be a tax levied on imported goods proportional to the carbon emitted in the manufacture of those goods. Suppose that China refuses to reduce emissions, while the United States adopts policies that set a price of $100 per ton of carbon emissions. If the United States were to impose such a carbon tariff, any shipment to America of Chinese goods whose production involved emitting a ton of carbon would result in a $100 tax over and above any other duties. Such tariffs, if levied by major players — probably the United States and the European Union — would give noncooperating countries a strong incentive to reconsider their positions.

To the objection that such a policy would be protectionist, a violation of the principles of free trade, one reply is, So? Keeping world markets open is important, but avoiding planetary catastrophe is a lot more important. In any case, however, you can argue that carbon tariffs are well within the rules of normal trade relations. As long as the tariff imposed on the carbon content of imports is comparable to the cost of domestic carbon licenses, the effect is to charge your own consumers a price that reflects the carbon emitted in what they buy, no matter where it is produced. That should be legal under international-trading rules. In fact, even the World Trade Organization, which is charged with policing trade policies, has published a study suggesting that carbon tariffs would pass muster.”

• One of the key obstacles to implementing carbon pricing policies in Canada is the concern that energy-intensive and trade exposed (EITE) companies will lose market share to companies located in regions without comparable policies in place, or that these companies will relocate altogether.

• While negative competitiveness impacts are a concern, they must be put in perspective. The sectors truly vulnerable to competitiveness pressures from a Canadian carbon pricing policy represent a small percentage of Canadian GDP. Policy makers must pay careful attention to how vulnerable sectors are identified and design appropriate policy measures to protect those that legitimately require it while still achieving environmental goals. Given that Canada is highly dependent on trade, to avoid any retaliation, it is also important
for Canada to implement a policy that does not have a negative impact on its key trading relationships. Putting in place measures to protect domestic firms cannot lead to explicit disadvantage for foreign industries, if retaliatory trade measures are to be avoided.

• While it is necessary to protect domestic EITE sectors, at the same time these sectors are the ones that most need to decarbonise their production processes. A carbon pricing policy compels these sectors to begin this transition, so while protecting them the incentive to
decrease their carbon intensity must be preserved.

• The long-term transition to lower carbon intensity is the ultimate strategy for ensuring that Canada’s economy remains competitive in a carbon-constrained world.

Mr Peters and his colleagues see no evidence so far that carbon-control policies, weak as they are, are shifting production to less regulated countries. Carbon follows trade patterns set by other factors; it does not shape them. Sterner carbon restrictions, though, might provoke rich-world industrialists to press for tariffs on carbon-intensive imports with which they cannot compete. A more fruitful approach might be to see the trend in terms of the need for greener investment outside the rich world. Spreading low-carbon technologies there matters as much or more than decarbonising developed countries.

The first is that a tax of this sort would be extremely hard to implement. Knowing what the carbon content of imports actually is would be tough. Worse, a car from Malaysia made of steel imported from energy-efficient Brazil should presumably be taxed at a different rate from the same Malaysian model made of steel from energy-inefficient Russia. That would be bizarre.

The second problem is that the tariffs would be punitive. Emerging markets like China and India use a lot of carbon in their manufacturing: more than 500 tonnes for every $1m of output. By comparison, America uses 200 tonnes and Europe and Japan less than 100 tonnes. So the tariff required would have to be huge: rich countries would impose a 21% tariff on Indian manufactures and 26% for goods made in China, reckon Messrs Mattoo and Subramanian. This would hammer the giants’ manufacturing: the economists calculate that such a tax would mean a 20% cut in Chinese manufactured exports and a 16% fall for India. Environmentalists might applaud. But such a drastic reduction would produce a slump in world trade—the two economists reckon global welfare would fall by 1%. And that is to say nothing of the unfairness of penalising China and India so heavily for making products whose end-users are mostly Europeans and Americans.

BRUSSELS (Reuters) – The European Commission plans a carbon border tax aimed at shielding European steel producers and other energy-intensive industries against cheaper imports from countries with less strict climate policies.

BEIJING — New European proposals to launch a “carbon border tax” will damage global efforts to tackle climate change, China said on Wednesday, urging a pushback against climate “protectionism,” a week before fresh global climate talks in Madrid.

But most net-zero targets refer only to the carbon produced within the target-setting entity’s borders. They exclude the carbon that is related to goods consumed there but produced elsewhere. When a Briton buys a smartphone made in a Chinese factory that is powered by a coal plant the carbon emitted in its manufacture does not count as “British”; the jet fuel that brings a South American guava to New York City is not counted as part of the Empire State’s emissions.

What to do? The worst approach would be an indiscriminate backlash against cross-border commerce. This is because the carbon footprint of trade varies according to the provenance of individual products. For example, a medium-sized electric-car battery made in Sweden, which uses lots of renewable energy, emits 350kg of carbon dioxide. The same battery made in Poland, which relies on coal, emits over 8,000kg. The mode of transport matters, too—goods that are transported by aircraft are far dirtier than those carried on ships.

Almost as bad would be simply to say that all the rich countries should promise to increase their putative negative emissions to match their carbon consumption. That would be fair in principle; but also a way to increase yet further the world’s reliance on the unproven technologies of carbon capture.

The world needs to shift towards goods that have a cleaner footprint, regardless of where they are produced. That will require manufacturing hubs to shift away from dirty sources of fuel such as coal, and fewer goods to be transported by air. A range of policies could accelerate this shift. At the gentle end of the spectrum, better labelling could prod consumers to consider the carbon footprint of what they buy. At the tougher end, the eu is considering a climate tax on dirty goods it imports. Today’s net-zero targets are better than nothing. But if climate change is to be tackled, countries and consumers must take full responsibility for their carbon.

At least 60 countries and over 100 cities have promised to get to “net zero”. The trouble is that few account fully for the emissions created by products that are consumed within their borders but produced outside them.

…

Inevitably, since production-based measures make rich countries look good (they also flatter small states that do little manufacturing), most have picked this methodology for their carbon targets. None of the 19 countries in the Carbon Neutrality Coalition have net-zero targets that explicitly aim to reduce consumption (carbon footprints are considered in another part of France’s legislation). Likewise New York’s net-zero target is production-based—helpful, since it is a state without much heavy industry. It is for this reason, among others, that Greta Thunberg, a teenage climate activist, told Britain’s Parliament in April that its climate goals amounted to little more than “creative carbon accounting”.

The gap between national consumption and production measures comes from the emissions that are embedded in cross-border trade. Such emissions make up a quarter of the global total. Scientists began to pay more attention to them as China became a manufacturing powerhouse following its entry into the World Trade Organisation in 2001. Its factories were powered by coal, the fossil fuel that emits the most carbon per unit of energy.

…

Purdue’s data show that cars and car parts exported by China are responsible for nine times more CO2 per dollar than those exported by Germany. Mathieu Poitrat Rachmaninoff, an analyst at Newton Investment Management, notes that on average about half of the lifetime emissions from an electric vehicle come from making the battery. A medium-sized battery made in renewables-rich Sweden emits around 350kg of CO2. For coal-reliant Poland, that figure is over eight tonnes.

To cut emissions, it is therefore necessary to look closely at products’ provenance. Sometimes the conclusions are counter-intuitive, as the tomatoes in New Covent Garden Market demonstrate. British tomatoes are grown in heated glasshouses and thus require three times more energy than sun-blessed Spanish ones. Even accounting for transport, local tomatoes are responsible for more emissions. Mike Berners-Lee of Lancaster University points out that a British apple bought in June has typically been in chilled storage for nine months. Keeping it cool for that long emits about as much carbon as shipping an apple from New Zealand.